Adv Retail Sales (OCT) (13:30 GMT; 08:30 EST)
Expected: 0.2%
Previous: 0.6%

Producer Price Index (YoY) (OCT) (13:30 GMT; 08:30 EST)
Expected: 6.4%
Previous: 4.4%

How Will The Markets React?

US economic data is expected to show a dismal mix of news for the Federal Reserve, as Advance Retail Sales are likely to show a slowdown in consumption growth while the producer price index may show inflation at the factory gate surging. Indeed, the estimates for both reports will not be extremely surprising as they simply highlight trends we’ve seen develop in recent months. First, the retail sales index is estimated to have slowed to 0.2 percent from 0.6 percent – held back by a 3 percent drop in autos (according to AutoData) – amidst rapidly deteriorating consumer confidence. Indeed, the Conference Board's consumer confidence index plunged to a two-year low of 95.6 during the month of October from a downwardly revised 99.5 in September on a gloomy combination of jittery financial markets, a collapsing housing sector, and oil rocketing to highs above $93/bbl (before breaching $98/bbl in November). Moreover, retailers from various sectors have already reported disappointing October sales, including mall-based stores like Limited Brands Inc., department stores like Macy's Inc., as well as upscale retailers like Nordstrom Inc., which announced a rare sales decline. Even low-cost retailers such as Wal-Mart Stores Inc. saw sales miss expectations despite aggressive discounting. Meanwhile, the Producer Price Index is anticipated to jump in October with the annualized rate predicted to hit a two-year high of 6.4 percent, in line with the surge in import price growth during the same period. Volatile products like oil and food will likely lead any gains in the index, but this will nevertheless be of concern to inflation hawks as the Federal Reserve’s more accommodative monetary policy stance may only be fanning consumer price growth. US financial markets are more likely to respond to the Advance Retail Sales report, with surprises to the upside or downside likely to spark significant volatility, particularly in the equity markets (when they open) and FX markets.

Bonds – 10-Year Treasury Note Futures

Treasuries have started to pull back slightly from 112-05, though daily charts still look bullish, leaving potential for the contract to continue higher for a test of 112-14. Economic data out of the US on Tuesday (pending home sales) and Wednesday (retail sales, PPI) may only help Treasuries push higher, but if US equities manage to stage a mild recovery in coming days, the contract could start to pull back towards multiple layers of support, with the closest levels at 111-255/21.

FX – EUR/USD

Following a few days of strong recovery for the greenback, EUR/USD has bounced from the 38.2 percent Fibonacci retracement level of the rally from 1.4130 to 1.4751 at 1.4519. However, the 1.4600 level has been able to hold back gains for the pair for now, but upcoming US event risk may ignite another round of dollar selling. Advance retail sales are expected to show a slowdown in consumption growth during October, which will not bode well for Q4 GDP. Stores like Wal-Mart and Macy’s have already reported disappointing spending figures for the same period, and with consumer confidence at two-year lows, a disappointing retail sales figure will not be entirely surprising. Nevertheless, if the data proves to be much weaker than expected, EUR/USD may make another push higher for the record highs at 1.4751 – though resistance at 1.4700 may slow the ascent. On the other hand, better-than-expected retail sales figure along with a forecasted jump in the producer price index could push the pair down towards the recent lows just above 1.4500, as the news would spark speculation that the Federal Reserve will not cut rates again in December.

Equities – Dow Jones Industrial Average

The Dow Jones Industrial Average has plunged precipitously over the past two weeks, though the index has stabilized slightly near the 13,000 level. While the Dow could manage to bounce on Tuesday towards resistance at the 200 SMA at 13,221, rampant news of billion dollar write-downs leaves the outlook for US equities gloomy. On Wednesday, this sentiment may only be exacerbated as the release of Advance Retail Sales is expected to show a slowdown in consumption while the Producer Price Index may highlight mounting inflation pressures. While this sort of data won’t be entirely surprisingly, it will only allow the equity market’s concern that the Federal Reserve will not cut rates again in December to percolate. While expansion in the US is clearly taking a hit amidst the collapse of the housing sector, upside inflation risks may be too great for the central bank to slash the federal funds rate by 25bp again in December. As a result, the Dow may continue to descend this week, with a break of 12,900 targeting the August lows at 12,517.94.

Terri Belkas is a Currency Strategist at FXCM.